Dynex Capital, Inc. Reports Second Quarter 2013 Diluted EPS of $0.54 and Book Value Per Common Share

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Dynex Capital, Inc.Reports Second Quarter 2013 Diluted EPS of $0.54 and Book Value Per Common Share of $8.94

GLEN ALLEN, Va.--(BUSINESS WIRE)-- Dynex Capital, Inc. (NYS: DX) reported net income available to common shareholders of $29.4 million, or $0.54 per diluted common share for the second quarter of 2013 versus $18.8 million, or $0.35 per diluted common share for the second quarter of 2012. The Company also reported book value per common share of $8.94 per common share at June 30, 2013 versus $10.50 at March 31, 2013.

Quarterly Highlights

   
($ in thousands, except per share amounts)2Q20131Q20132Q2012
Net interest income$22,444$22,526$19,008
Gain on sale of investments, net$2,031$1,391$2,587
Fair value adjustments, net$10,753$(157)$117
General and administrative expenses$(3,795)$(3,808)$(3,024)
Net income to common shareholders$29,442$18,381$18,847
Earnings per common share$0.54$0.34$0.35
Dividend per common share$0.29$0.29$0.29
Return on average common equity (annualized)(1)13.2%13.0%14.3%
Interest earnings assets, end of period$4,627,188$4,531,342$3,276,170
Average interest earning assets$4,565,733$4,098,681$3,339,546
Average interest bearing liabilities$(4,068,830)$(3,641,654)$(2,916,801)
RMBS/single-family capital allocation, end of period$218,029$233,870$204,631
CMBS/commercial capital allocation, end of period$313,133$362,693$279,545
Book value per common share, end of period$8.94$10.50$9.66
Net interest spread1.75%1.89%2.18%
Portfolio CPR (excluding CMBS IO)21.0%19.3%14.3%
Debt to shareholders' equity ratio, end of period6.8x6.3x6.1x
 

(1)The annualized return on average common equity for the second quarter of 2013 was calculated using an adjusted net income to common shareholders of $18.4 million. This amount excludes fair value adjustments of $11.0 million related to long-term interest rate swaps added during the quarter for which the Company did not elect hedge accounting. On a GAAP basis, including the fair value adjustments, our net income to common shareholders and annualized return on average common equity for the second quarter of 2013 were $29.4 million and 21.0%, respectively. Management believes the adjusted return on average common equity is useful to investors because it enhances comparability between the periods presented.


Conference Call

As previously announced, the Company's quarterly conference call to discuss the second quarter results is 11:00 a.m. ET on August 1, 2013. Interested investors may access the call by dialing 1-888-317-6016 or by accessing the webcast, the link for which is provided under "Investor Relations/IR Highlights" on our website (www.dynexcapital.com). A slide presentation will accompany the webcast and will also be available one hour prior to the call at the same location on our website.

Management Remarks

Mr. Thomas Akin, Chairman and Chief Executive Officer, commented, "Mortgage REIT portfolios experienced a volatile combination of rising rates and spreads during the second quarter that sent book values substantially lower. Leverage ratios were also affected and moved sharply higher for most mortgage REITs as book values dropped. At Dynex, we were disappointed to see our book value decrease, but our business model and portfolio remain largely intact as our leverage moved modestly higher and yet remained within our targets. Additionally, because we did not invest in 15-year or 30-year mortgages but instead invested in securities with shorter maturities and more predictable cash flows, our duration extension in the quarter was minimal. Going forward, we expect to maintain our leverage target below 6.5 times consistent with our investment discipline. Our conservative investment strategy of low duration, high quality investments remains applicable in the current environment, and we expect to recover shareholder value as our portfolio rolls down the yield curve and as markets stabilize."

Mr. Byron Boston, President and Chief Investment Officer commented, "Market events were extraordinary during the quarter leading to extreme price volatility in fixed income securities. During the quarter the ten-year Treasury rate increased by 64 basis points, but the bulk of the price volatility resulted from widening in market credit spreads versus higher interest rates. Fed talk of reducing bond purchases, global de-risking, bond fund redemptions, and regulatory constraints, led to reduced liquidity and lack of transparency in MBS pricing. The unusual combination of the increase in interest rates and the simultaneous widening of credit spreads had the equivalent impact of an approximate 200 basis point rise in interest rates on a substantial portion of our investment portfolio. While we have seen some stabilizing since quarter end, markets continue to be data dependent and volatile and could remain this way until the economic picture becomes clearer. Financing has not been a concern, and we are continuing to prioritize our liquidity and financial flexibility."

Market Summary

The following table provides various interest rates and credit spreads on assets (expressed in basis points) owned by the Company as well as other market credit spreads as of June 30, 2013 and March 31, 2013:

  
June 30, 2013March 31, 2013
2 year vs. 10 year Treasury spread218166
Hybrid ARM 5/1 (2.0% coupon) spread to Treasuries4518
Hybrid ARM 10/1 (2.5% coupon) spread to Treasuries7534
Agency CMBS spread to Treasuries9259
'A'-rated CMBS spread to Treasuries287205
Agency CMBS IO spread to interest rate swaps200115
CC 30 year FNMA zero vol spread to Treasuries4329
IG Index spread to Treasuries165154
HY Index spread to Treasuries537501
CMBX.NA.A.6 (2012 'A'-rated)254200
 

Quarterly Performance Summary

Net interest income decreased slightly to $22.4 million for the second quarter of 2013 from $22.5 million for the first quarter of 2013 due primarily to increased expense from interest rate swaps and lower prepayment penalty income received on CMBS IO securities. Net interest spread for the second quarter of 2013 was 1.75% which consisted of the yield on interest-earning investments of 2.86% less the cost of funds of 1.11%. For the first quarter of 2013, net interest spread was 1.89% which consisted of the yield on the Company's interest-earning investments of 3.04% less the cost of funds of 1.15%. For the second quarter of 2012, the net interest spread was 2.18% which consisted of the yield on the Company's interest-earning investments of 3.29% less the cost of funds of 1.11%. Although our average interest earning investments increased in the second quarter of 2013 compared to the first quarter of 2013, our net interest spread declined in the second quarter compared to the first quarter primarily due to the addition of lower coupon assets at the end of the first quarter and the beginning of the second quarter.

Fair value adjustments, net for the second quarter of 2013 include $11.4 million related to the market value increase in the Company's interest rate swaps designated as trading, which is primarily the result of four 10-year interest rate swaps with a combined notional balance of $180 million that the Company entered into during the second quarter. Please see "Hedging Activities" below for further discussion. Partially offsetting that increase was a $0.6 million decline in the market value of certain Agency CMBS designated as trading securities.

During the second quarter of 2013, the Company sold CMBS and CMBS IO investments with an amortized cost basis of $144.5 million for a net gain of $2.6 million. These investments earned a weighted-average yield of 4.88% during the quarter. The Company also sold RMBS investments with an amortized cost basis of $10.1 million at a loss of $0.6 million.

General and administrative expenses were $3.8 million in the second quarter of 2013, or 0.57% of average shareholders' equity, versus $3.8 million, or 0.61% of average shareholders' equity, in the first quarter of 2013.

During the quarter the Company issued 2.25 million shares of 7.625% Series B Preferred Stock for net proceeds of $54.3 million which it invested principally in Agency hybrid ARMs. No shares of common stock were repurchased during the quarter. Principally as a result the decline in fair value in the Company's investments, accumulated other comprehensive income declined $96.7 million, or $1.76 per common share, during the second quarter to an accumulated loss position of $35.1 million, or $0.64 per common share at June 30, 2013. Book value per common share was $8.94, representing a decline of 15% from March 31, 2013 and 13% from December 31, 2012. The following table reconciles the changes in the Company's book value per common share from March 31, 2013 to June 30, 2013 (changes in fair value of MBS due to changes in interest rates and changes in credit spreads are based on Company estimates):

 
Book value per common share, March 31, 2013$10.50
Net income in excess of dividends declared (1)0.05

Changes in fair value of MBS classified as available-for-sale, net of hedges, due to changes in interest rates

(0.50)
Changes in fair value of MBS classified as available-for-sale due to changes in credit spreads(1.06)
Capital transactions:
Issuance of Series B Preferred Stock(0.04)
Other, net (0.01)
Book value per common share, June 30, 2013$8.94 
 

(1) "Net income in excess of dividends declared" excludes $11.0 million, or $0.20 per common share, in fair value adjustments, net recorded during the quarter which relates to 10-year interest rate swaps which are designated as trading but considered economic hedges of interest rate risk. Such amounts are included in "Changes in fair value of MBS classified as available-for-sale, net of hedges, due to changes in interest rates" in the table.

 

Investments

The following tables present certain information for the Company's MBS portfolio by category as of and for the dates and periods presented:

  
As of June 30, 20132Q2013
Principal    
Balance
(notional forNet PremiumAmortized

WAVG

WAVG Yield

($ in thousands)

CMBS IO)(Discount)CostFair Value

Coupon

(2)

Agency MBS:
RMBS$2,966,661$170,225$3,136,886$3,084,3673.34%1.90%
CMBS306,84822,916329,764342,3105.20%3.54%
CMBS IO 10,641,141 540,484 540,484 550,1890.87%4.54%
Total (1)$3,273,509$733,625$4,007,134$3,976,8662.43%
 
Non-Agency MBS:
RMBS$12,315$352$11,963$12,0644.64%4.99%
CMBS448,97318,436430,537439,7755.33%5.62%
CMBS IO 2,821,042 128,428 128,428 130,6180.87%4.47%
Total (1)$461,288$147,216$570,928$582,4575.39%
     
Total MBS portfolio:$3,734,797$880,841$4,578,062$4,559,3232.82%
 
   
($ in thousands)2Q20131Q20132Q2012
Agency MBS:
Weighted average annualized yield for the period (2)2.43%2.60%2.75%
Weighted average annualized cost of funds including interest rate swaps for the period (0.91)% (0.93)% (0.88)%
Net interest spread for the period 1.52% 1.67% 1.87%
Average balance of investments for the period (1)$3,903,717$3,456,841$2,755,376
Average balance of financing for the period$(3,520,250)$(3,128,324)$(2,466,672)
 
Non-Agency MBS:
Weighted average annualized yield for the period (2)5.39%5.39%6.05%
Weighted average annualized cost of funds including interest rate swaps for the period (2.45)% (2.58)% (2.55)%
Net interest spread for the period 2.94% 2.81% 3.50%
Average balance of investments for the period (1)$596,506$572,312$472,106
Average balance of financing for the period$(511,034)$(473,177)$(381,826)
 

(1)

 

Total principal balance and average balance of investments exclude notional amounts of CMBS IO.

(2)

Weighted average yield is based on weighted average amortized cost of investments for the quarter.

 

The following table presents the weighted average of constant prepayment rates ("CPRs") for the Company's Agency MBS for the periods presented:

    
2Q20131Q20134Q20123Q2012
RMBS25.7%24.8%24.3%23.4%
CMBS0.0%0.0%0.0%0.0%
Total weighted average (1)23.2%22.0%21.5%20.9%
 

(1)

 

CPRs for CMBS IO are not calculated and reported. If CPRs for CMBS IO were included, the total weighted averages above would be lower.

 

The following table presents the weighted average coupon by weighted average months-to-reset ("MTR") for the variable-rate portion of our Agency RMBS based on par value as of June 30, 2013 and December 31, 2012:

  
June 30, 2013December 31, 2012
 WAVG WAVG

($ in thousands)

Par ValueCouponPar ValueCoupon
0-12 MTR$479,6053.29%$523,711 Read Full Story

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